Firms need clarity over new tax rules in voluntary liquidations

From April 6, Members’ Voluntary Liquidations (MVLs) – where company directors close down a solvent business and distribute the net assets among shareholders – are now subject to a Targeted Anti-Avoidance Rule (TAAR), meaning shareholders could have distributions taxed as income rather than capital gains, the Scottish accountancy firm said.

In addition, existing tax anti-avoidance legislation has been beefed up to put beyond doubt that a distribution on a winding-up can be taxed as income rather than capital gains.

The initiatives have been brought in to prevent individuals obtaining what HMRC perceive as an unfair tax advantage by carrying out transactions in certain circumstances. The TAAR in particular targets individuals using the winding-up process to convert income to capital whilst continuing to then operate in the same or a similar trade.

An MVL was often used to make a distribution at the end of a company’s useful life, but Donald McNaught, partner at Johnston Carmichael, and chair of the insolvency committee at the Institute of Chartered Accountants Of Scotland (ICAS), said an absence of current guidance from HMRC made it hard for clients to know how to act within the law.

Prior to April 6 there was a surge of requests for MVLs, as companies sought to avoid being caught by changes.

Donald said until clear guidance was provided by HMRC as to which transactions would be caught by the changes, there was a risk to shareholders who chose to put a company into an MVL for legitimate reasons.

He said: “The vast majority of MVLs are done for the right reasons – it could be a short-term project vehicle which is no longer needed, or part of a group is being wound down because it’s no longer viable, or a long standing business which has come to its natural end. For example, property developers use Special Purpose Vehicles for individual developments to ring fence commercial risk, rather than trying to achieve a tax saving.

“We also have clients who entered an MVL process months prior to the changes but are now exposed to a retrospective change to the tax treatment of their distributions.

“However, the rules around how the TAAR in particular will be applied are sufficiently opaque that even professional advisers are finding it difficult to take a view on what kinds of structures HMRC will allow and what it won’t.

“Clients are going to increasingly incur disproportionate costs to obtain tax clearance in advance of any closure to avoid any uncertainty and some commentators have already suggested that the additional cost burden and uncertain tax benefits will discourage enterprise.

“We need to have some clarity so MVLs can allow businesses to grow, flourish – or fail – as necessary, without shareholders worrying about what sort of tax bill they’re going to get.

“There’s also significant reputational damage which can arise from a tussle with HMRC, and there would be a real benefit and comfort to a greater degree of guidance from the tax authorities on this issue.”